More than one-third of local government retirement plans in Pennsylvania are financially distressed, according to a new report issued by state Auditor General Jack Wagner.

To combat the problem, Wagner has proposed that the 2,600 municipal plans his office audits — another 600 are county and municipal plans over which it has no jurisdiction — be consolidated into a statewide system for different classes of employees.

For example, all local police pensions would fall into one system. Plans for firefighters and non-uniformed employees would be lumped into other systems, Wagner said.

"Pennsylvania has too many small and underfunded municipal pension plans that could cost taxpayers millions of dollars to maintain," he said.

The report shows that 52, or 2 percent, of the 2,600 plans are seriously underfunded, with less than 50 percent of their liabilities covered.

Plan debts could mean skyrocketing taxes at the local level to cover contributions, which affects businesses and other taxpayers.

Consolidation would yield higher investment return rates for municipal employees, reduce administrative costs and help reduce the need for increased contributions from taxpayers, Wagner said. An alternative would be to maintain the existing system of individual pension plans but consolidate their administration into one entity, such as the Pennsylvania Municipal Retirement System or the State Employees' Retirement System, he said.

Wagner also wants the General Assembly, which has its sights set on state-level pension reforms, to consider amending the formula for the allocation of state municipal pension aid. His office is required to distribute the 2 percent foreign fire and casualty insurance tax funds to municipal pension plans in accordance with Act 205 of 1984.

In 2011, that distribution was $361.6 million.

By the numbers

• Two-thirds: Municipal pension plans audited by the Department of the Auditor General with 10 or fewer members

• 58 percent: The aggregate funding ratio of the 2,600 municipal plans • 52: The number of plans identified as "severely distressed"